Addressing Valuation as Core Issue of the Private Asset Bubble

At the recent conference The Law and Finance of Private Equity and Venture Capital | 2026 we discussed private markets, corporate governance, impacts on financial stability and the role of investment funds. These themes have been discussed in a number of regulatory fora around the world to date where I was invited to speak, including the Global Risk Conference of the Global Association of Risk Professionals (GARP) and the Bank for International Settlements in Fall 2025, the European Securities & Markets Authority in Spring 2026 and many more. The topic is high on the regulatory agenda.

In all of these fora concerns were aired that a private asset bubble with potential systemic implications threatens global financial stability. Participants concluded from the fact that some open-ended private markets funds stopped redemptions and were in liquidity stress that the sector as a whole is in crisis. 

My personal view is more nuanced. I hold that some private market actors have a valuation problem, while many actors apply a prudent approach to valuation. Where actors applied prudent approaches to valuation, these actors face few difficulties. 

The valuation problem that some actors experience today stems from an unhealthy relation of fund size, compensation mechanisms, investor expectations, valuation techniques and cooperation across the industry. Assume you are a €10 billion private market fund. Your sales team has attracted investors with a profit expectation of 25% p.a. commensurate to the risk. To ensure you are properly incentivized to identify profitable investments, investors granted you the 2/20 compensation widely spread in the private equity space, with an 8 percent preferred investor return. Your expected life of the fund is approximately 7 years. You started investing in 2019 and 2020. To realize your carry and the 25% p.a. which are crucial for your reputation in the private asset market, you need to sell your assets today at a €25 billion valuation. If you seek an exit via the stock markets, this is equal to selling 25 unicorns, valued at €1 billion or more, to the market. However, there are plenty of other actors of a similar size, and all of them want to sell their unicorns. Even at times of high valuations (like the present) the global public equity markets can absorb only so many unicorns, with estimates ranging from 40 to 50 unicorns p.a. That leaves you with the option of selling large stakes of your portfolio to other private market actors. 

Here, the problem starts. Valuation of private markets can rely on traditional valuation methods like discounted cash flow. But an often used valuation method is peer-to-peer. That means that whenever there is a transaction in the shares of your holding the transaction price impacts on your own NAV calculation. Even further, peer-to-peer valuations are also often applied across similar industries: you hold shares in Company A in Sector 1 (eg digital infrastructure) valued at EBITDA x 10. Company B that is also active in Sector 1, increases its capital at a multiple of EBITDA x 12 due to strong earnings and strong investor demand. This can then give rise to upward valuation rounds at EBITDA x 12 across all companies active in Sector 1 held by private market actors. 

The issue is that a small amount of cash drives an upward spiral across all private assets, with business models and firms akin to the sector where transactions take place sucked into the upward spiral effects.

While we may see the same with public markets, the issue of private markets is a lack of arbitrage. Where a valuation is too high there is no actor betting directly on falling prices, and indirect bets (by shorting for instance the stakes of the involved investment fund managers - IFMs) are too imprecise to have steering effects; besides, many of the IFMs are unlisted. 

As an exacerbating factor, private market actors colluding with other private market actors can game the valuation at an opportune time. The one point in time where valuation matters for the IFM is Exit Time: investors want to see their 25% p.a. realized, and the IFM seeks to cash in its carried interest. What happens before and after Exit Time is of little importance to both investors and IFM. Private market actors seeking to game the system may collude with other actors: you buy my shares in Company A at EBITDA x 20 at Exit Time, and I owe you next time you are in trouble. This does not require the set-up of continuation funds – these do exist, but here the conflicts of interests are obvious. Rather, by slicing and dicing the companies they hold, by creating subsidiaries and asset deals rather than share deals, private market actors can engage in transactions that facilitate enhancing book values while avoiding outright secondary sales. 

Many private market actors are still unregulated and unsupervised and not asked to disclose their holdings, valuations and transactions to investors, the public and financial supervisory authorities. (A notable exception is the European Union with its Directive on Alternative Investment Fund Managers mandating IFMs to disclose details on many of these items to regulators and investors.) 

I do not argue here that regulation of private market actors is a panacea. Yet more transparency of valuations, transactions, and interlinkages within the industry is desirable, so that financial regulators across all sectors – including bank regulators (in charge of controlling lending as additional fuel to high valuations), securities regulators (in charge of equity markets and asset managers) and central banks (in charge of systemic risk supervision) – plus academia do better understand the interlinkages and valuation mechanics within private markets.

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Dirk Andreas Zetzsche is Head of the Department of Law, Full Professor of Financial Law, and ADA Chair in Financial Law and Inclusive Finance at the University of Luxembourg. (ECGI academic member)

This blog is based on a paper presented at the 5th conference on The Law and Finance of Private Equity and Venture Capital, held at Goethe University Frankfurt. The conference was convened by Bocconi University, the DFG LawFin Center at Goethe University Frankfurt, LSE Law School, the Faculty of Law of the University of Oxford, and the Institute for Law & Economics at the University of Pennsylvania, together with ECGI., Visit the event page to explore more conference-related blogs.

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